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Economics

13 Economic Challenges

13-1 UNEMPLOYMENT

Economists examine four kinds of unemployment.  Frictional unemployment

occurs when people are in between jobs or returning to the work force after a period

of not working. Seasonal unemployment occurs in industries that slow or shut

down for a particular time of the year, such as after a harvest or a busy holiday season. Structural unemployment happens when workers’ skills do not match the jobs that are available. For example, new technology may cost jobs in industries that rely on older ways of producing goods. Cyclical unemployment occurs during recessions, when the demand for goods and services drops. The resulting slowdown in production causes the demand for labor to drop, and companies lay off employees. The amount of unemployment is an important clue to the health of the nation’s economy. The federal government tracks the unemployment rate, or the percentage of the nation’s labor

force that is unemployed. To determine the unemployment rate, the Bureau of Labor Statistics polls a large sample of the population every month. Since frictional, seasonal, and structural employment occur even in an economy that is working properly, economists expect some unemployment. An unemployment rate of 4 to 6 percent is considered full employment, the level of employment reached when there is no

cyclical unemployment. However, some people with jobs are underemployed,

meaning that they work part time when they want full-time jobs, or work at jobs

that are below their skills.

 

13-2 INFLATION

Inflation is a general increase in prices. In a period of inflation, as prices rise, the

same amount of money buys less. Inflation reduces people’s purchasing power, their ability to buy goods and services. To track inflation, economists use a price index, a measurement that shows how the average price of a standard group of goods changes over time. The best known is the Consumer Price Index (CPI). The CPI measures the

prices of a market basket—a representative collection of goods and services used by a typical urban consumer. Economists will calculate the change in the CPI from year to year to determine the inflation rate, the percentage change in prices over time. Economists offer three reasons for why inflation begins. The quantity theory

states that too much money in the economy leads to inflation. According to the demand-pull theory, inflation occurs when demand for goods and services exceeds existing supplies. Finally, the cost-push theory states that inflation occurs when producers raise

prices in order to meet increased costs for labor and raw materials. Cost-push inflation can lead to a wage-price spiral. This is the process by which increases in one type of prices can cause other prices to rise. Typically, when unemployment falls to very low levels, inflation tends to increase. The supply of available workers shrinks and wages rise. In the late 1990s, however, unemployment fell to very low levels and inflation

also remained low. Economists disagreed about the reasons for the combination of

low unemployment and low inflation.

 

13-3 POVERTY

The government defines a poor family as one whose total income is less than the amount needed to satisfy minimal needs. The U.S. Census Bureau determines the poverty threshold, the income level below that which is needed to support a household or family. This threshold varies with family size. In 1999, the threshold was $11,235 for a single parent with one child, and $16,530 for a family of four with two children. The poverty

rate is the percentage of people who live in households below the poverty threshold. The poverty rate varies among different groups. Among African Americans or Latinos, it is twice as high as for white Americans. The causes of poverty include unemployment, lack of education, and discrimination based on race and gender. Many poor people live in areas such as inner cities or isolated rural areas, where there are few high-paying jobs. Other causes of poverty include economic slowdowns and the increasing number of

single-parent families. The United States has millions of poor people, but it also has the world’s highest per capital GDP. This is because income distribution, the way income is distributed among the population, is unequal. The richest 20 percent of the population

has more than 13 times the income of the poorest 20 percent. The government spends billions of dollars on programs designed to reduce poverty. Enterprise zones, for example, are low-employment areas where companies can locate free of certain taxes.